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Nestle to put milk-based products on ‘watch’

29-June-2005
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Nestle to put milk-based products on ‘watch’

Milk and milk-based products is the subject of heated debate in Nestle India these days.

At operational plan meetings over the past few months, the company has been discussing the idea of putting certain products on 'watch' for a definite period at the end of which it would decide the future course for those products.

Sources say curd and UHT milk are two such products, apart from the health drink brand, Milo. In fact, the company has intensified its study on consumer preference for Milo over the rival brands.

Though Milo is one of the leaders globally in its segment, in India it has not been able to make much headway.

“The company wants to maintain long-term profitability, so these products are on the watch list, a company source told ET. “UHT milk is, however, being given a re-look globally,” sources said.

This effectively means that it could discontinue a couple of these products. The company has over a period discontinued some of its confectionery products, pickles and water offerings but this is the first time a re-look is happening under its new chairman and MD, Martial Rolland.

Curd is a profitable category once it hits a specific volume. In Delhi, for instance, an annual volume of 200 tonnes could make it highly profitable, but Nestle India does around 80-100 tonnes per year which is growing below expectation considering the premium it charges over the rival brands and because of its restricted reach. That is unlikely to change in the short term, analysts pointed out.

“Milk products requires a cold chain, which many distributors are averse to invest in,” says a large Nestle distributor. That means lower distribution reach for milk products. Several mails and calls by ET to the company didn't elicit any response. When contacted, a Nestle spokesperson at its headquarters in Vevey, Francois Xavier Perroud, promised a response which never came even after two days.

The Indian arm's decision should be seen in the wake Nestle's announcement of “progressive withdrawal from basic commodity processing”. According to the company's web site, in large parts of Latin America, as well as in several European countries, the Group has already sold its basic milk powder plants or brought them into a series of JV operations with Fonterra, the New Zealand-based dairy company.

Now, Nestle Australia also will cease manufacturing milk powder as the result of its agreement with Fonterra. Simultaneously, Nestle will also restructure its Tongala (Victoria) milk factory, cease its milk powder production and continue to manufacture only liquid milk products. In the Netherlands, Nestle's Gorinchem powdered milk factory was acquired by a Dutch entrepreneur, Mr Jaap Vreugdenhill, effective June 1, '05.

The factory, with a workforce of about 140 people, produces milk powder, mainly for export to the Zone Asia, Oceania and Africa. Over the next years, Nestle will continue to source part of its semi-finished milk powder requirements for export from the Gorinchem unit and about 1,000 farmers will go on supplying milk to the factory.

The move comes on the heels of the ERP implementation under the much talked about Project Globe (Global Business Excellence) - a worldwide initiative of Nestle Group to implement best in class processes, systems and practices.

The programme envisages constant benchmarking of operations against the best in class in the Nestle Group, to enable the company to achieve a competitive advantage.

The management has indicated that this is likely to adversely impact costs in the short run. In the absence of significant topline growth triggers and continuing cost pressures, analysts expect Nestle's profitability to remain muted.

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